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World in Motion – Global equities blog

Sim when you’re winning

Simulation is reshaping industries. Take ANSYS1, a business which provides optimisation solutions to markets spanning aerospace, automotive, energy, materials and chemical processing – solutions which become deeply integrated into product design lifecycles. These enable engineers to emulate real world environments and better assess component quality and reliability in increasingly complex products. The result is faster speed-to-market, better decision making and risk mitigation. Having identified the potential of ANSYS early, our portfolios benefitted meaningfully from its rise to a $30 billion company today.2

There are signs that healthcare could provide another wave of simulation demand – especially in drug development:

Expected peak sales from therapies have been falling, by 54% between 2010 and 2019 among the top 12 biopharma companies, according to Deloitte (Figure 1).3

The costs of developing drugs are rising. Deloitte’s same study showed the average cost of bringing a drug to market increased by 67% during the 2010s.

Failure rates remain very high. Two-thirds of drug development programs never deliver an investigational new drug (IND) for clinical trials.

Regulatory requirements are unrelenting. The market for regulatory science and support alone is valued at more than $7 billion, compounding in the low-double digits.

Barriers for new entrants are falling. According to Charles River Laboratories4, biotech represented 70% of pipeline assets in 2019, up from 45% in 2014; while the estimated number of biopharma companies globally doubled to around 4,800 between 2011 and 2020.

Figure 1: higher costs and lower rewards in drug development

Average cost of bringing drug to market graph

Source: Deloitte, 10 years on: Measuring the return from pharmaceutical innovation, 2020

The case for investment to boost drug development efficiency is therefore compelling; declining returns demand transformational shifts in R&D productivity. So, how can biosimulation help?

Computing power now not only enables companies to survive the deluge of biosimulation data available to them, but to make sense of it. Schrödinger5 is one business capitalising on this, with a platform which can evaluate billions of molecules a week, compared to 1,000 molecules a year using traditional laboratory-based methods. This is critical in lead optimisation.
A move along the drug development pathway to clinical trials brings our strategy’s second biosimulation play into view. Certara6 has developed core products which help to inform clinical trial design and mitigate unforeseen risks through population and organ modelling. Clinical stage work includes understanding how drugs affect the body, how the body processes and affects the drug, how different doses impact different population groups, and how drugs interact with one another. Biosimulation is proving increasingly helpful in these areas.

A third of all drugs approved by the FDA in 2019 utilised Simcyp, one of Certara’s core biosimulation solutions, up from 13% in 2014.7 Plus, to capitalise on the growing pipeline share of small- and mid-sized biotechs the company has established a comprehensive software, regulatory and market access service for smaller companies with ambitions in drug development which may lack resource or expertise. Between licensing and outsourcing services, we estimate around 60% of Certara’s revenue is generated through biosimulation, with prospects of attractive, durable growth from the prevailing industry trends.

Given the scalability of simulation business models, success means profitability. During 2006, ANSYS generated $264 million in revenue. Fast-forward to 2019 and that figure stood at over $1.5 billion (Figure 2). Gross margins are now touching 90%.8 Meanwhile, Schrödinger’s annualised software revenue is currently around $100 million. The company reports it is beginning to see step-ups in adoption from some of its largest customers, with 16 enrolled in annual contracts worth over $1 million – up from three in 2013.9 And while this business model is not all about the software given its drug development ambitions, gross margins in this division currently stand at 81%.10 With the biosimulation market’s value already exceeding $2 billion, backed by a sustainable, projected annual growth rate of 15%, the company’s roadmap to scale – and consequently, profitability – looks attractively paved.

Figure 2: ANSYS – a model for scalability

Revenue gross margin graph

Source: Bloomberg, 2021

One of the most frequent lines we hear from healthcare management teams and analysts is that “changing healthcare is hard”. But the advancements of biosimulation may well prove to be one change companies can’t afford to ignore.

29 April 2021
Alex Beavis
Alex Beavis
Global Small Cap Analyst
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April 2021
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1 Mention of specific stocks is not a recommendation to buy
2 Past performance is not a guide to future returns
3 https://www2.deloitte.com/uk/en/pages/life-sciences-and-healthcare/articles/measuring-return-from-pharmaceutical-innovation.html, 2020
4 https://ir.criver.com/static-files/157c1622-808b-4c32-847d-23b8e933e860, 2019
5 Mention of specific stocks is not a recommendation to buy
6 Mention of specific stocks is not a recommendation to buy
7 https://ir.certara.com/static-files/7787d739-c148-49ce-a730-25f273fecd4b, 2020.
8 Bloomberg, 2021
9 https://ir.schrodinger.com/static-files/afed9256-e98b-403f-bb38-e88393f46336, 2021
10 https://ir.schrodinger.com/static-files/afed9256-e98b-403f-bb38-e88393f46336, 2021

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